Don’t just blame the regulator for London’s failed American dreams

When the UK proposed making board members responsible for signing off on internal controls over financial reporting, the reaction was furious. It’s unfriendly to business, the city grandees thundered, it discourages good people from joining boards and traps directors in bureaucracy.

The proposal was based on the US Sarbanes-Oxley rules, which work perfectly in the land of the free. But the British government backed out of the idea.

The US is also home to so-called quarterly capitalism, so onerous and short-term that it was scrapped as a UK requirement in 2014 in favor of less frequent reporting. The hamster wheel of US disclosure is overseen by the renowned Securities and Exchange Commission weakling, backed by a nation of rampaging lawyers ready to drop a class action lawsuit at any opportunity.

However, companies such as chip designer Arm, cement group CRH and betting group Flutter are keen to enter this hostile environment as they are attracted to a larger, more liquid pool of capital which currently tends to trade higher valuations than the UK market. The wrong answer would be to fixate on the individual grievances behind each migration, rather than looking at the bigger picture.

Whether invaders in the USA will do as well there as domestic companies remains to be seen. Unlike the FTSE, there is a lot of discretion over who is included as one of the “leading companies” in the S&P 500 index: this also requires being considered a US company and not just US listed. The London Stock Exchange points out that international IPOs in US markets, which have exceeded $100 million since 2018,

But they go anyway. SoftBank’s decision not to double-list Arm in favor of an all-US float is particularly annoying. A simultaneous listing in London only paid off for SoftBank if it qualified for the index. It reportedly didn’t want to join the rules for London’s ‘premium’ market segment, a condition for inclusion in the FTSE 100. In particular, it didn’t like the rules for related-party transactions.

According to some City advisors, it’s not obvious why these rules would cause such a headache for SoftBank. The crux of the UK rules is that independent shareholders should vote on related party transactions above a certain size. (The US version is to lay yourself open and let everyone sue you if they don’t like it). However, activities within the scope of ordinary business activities are excluded. If Masayoshi Son doesn’t have a specific deal in mind, why was this such a stumbling block?

Anyway, it seems grumpy to point fingers at the dial. The Financial Conduct Authority is already reviewing premium requirements as part of a process that is considering merging premium and standard into one segment. True, his original paper was quite confused; it has moved more slowly than some would like. However, the regulator’s initial findings last year were that most respondents found related party protections valuable, with few citing them as a barrier to listing. It seems difficult to justify a SoftBank exception to a market rule that has broad support.

London has been down this path before and embarrassingly adjusted the rules to accommodate Saudi Aramco’s listing to stay ahead of New York. It didn’t happen and the new Sovereign category created within the premium listing rules was never used. In any event, this fudge would not necessarily have secured inclusion in the index, as the latter decision rests with FTSE Russell.

The disadvantages of listing in the US are absorbed as costs of doing business there, as was the case for London in the past. Updating the UK listing and governance rules is part of the solution. But also long-term pension reform, rebuilding a dwindling domestic investor base and closing a valuation haircut partly due to Brexit and political dysfunction. What shouldn’t be is bowing down to the particular nags of every major issuer for fear they’ll go elsewhere.

helen.thomas@ft.com
@helentbiz